Are business loans tax deductible in the UK?

In the UK, the interest you pay on a business loan is usually an allowable expense that reduces your taxable profit, provided the money is used wholly for business purposes. The amount you borrow (the principal) is not taxable income when you receive it, and repaying it is not a deductible expense. How relief works in practice depends on whether you are a sole trader, partnership or limited company.

This guide is for sole traders, partners and company directors who have borrowed, or are about to borrow, and want to understand the tax effect. It is general information, not tax advice. Smart Funding Solutions is a broker that arranges finance from a panel of 300+ lenders; for the finance options themselves, see our business finance guide.

01What is tax-deductible on a business loan

• Interest: normally deductible when the loan is used for business purposes.
• Arrangement and other finance fees: incidental costs of obtaining business finance are generally allowable too.
• Principal repayments: not deductible. They simply return money you borrowed.
• The loan itself: not taxable income when it arrives in your account.

What you spend a business loan on can also affect your tax. If you buy equipment or vehicles, you may be able to claim capital allowances on the asset, in addition to deducting the interest.

02Principal versus interest

Each business loan repayment usually includes some principal and some interest. Only the interest part reduces taxable profit. Your lender's statements will show the split, so keep them with your accounting records. On an interest-only or revolving facility, the charges shown on your statements are the figure you will typically use.

Illustrative example only — not a quote or offer of finance.

If a year's loan repayments total £12,000 and the lender's statement shows £10,500 of that reduced the balance and £1,500 was interest, only the £1,500 goes into the accounts as a finance cost. The £10,500 reduces the loan on the balance sheet but does not reduce taxable profit.

03Mixed business and personal use

HMRC only allows relief on interest relating to business use. If part of a loan funds something personal, only the business share of the interest can be claimed. For example, if some of a loan paid for a work van and the rest paid for a family holiday, you could only claim interest on the van portion. Keeping business borrowing separate from personal spending makes this far simpler.

Each business loan repayment usually includes some principal and some interest.

04How the rules differ by business type

Sole traders and partnerships

Interest and incidental costs on business loans are generally allowable expenses when you work out your profit for Self Assessment. There are specific rules depending on how you prepare your accounts, so check HMRC's guidance on allowable expenses or ask your accountant.

Limited companies

A company can usually deduct interest on business borrowing when calculating its Corporation Tax. Larger groups can be affected by additional rules that restrict interest deductions, but these rarely affect small businesses.

Director's loans to the company

If you lend money to your own company and it pays you interest, that interest is generally a deductible cost for the company and taxable income for you personally. The company may need to deduct Income Tax from the interest and report it to HMRC. Director's loan accounts also carry their own rules if money flows the other way, so take advice before setting one up.

05Secured and unsecured loans

The same principle applies whether a loan is secured or unsecured: what matters for tax is what the money is used for, not the type of loan. Interest on a loan used wholly for business is typically deductible either way.

06Asset finance and capital allowances

How asset finance is taxed depends on the structure:

• Hire purchase: you are usually treated as owning the asset, so you may claim capital allowances on its cost and deduct the interest element separately.
• Leasing: rentals are often treated as a business expense, and the lender, as owner, claims any capital allowances.

Capital allowance rules change from time to time, so check the current position on GOV.UK or with your accountant before you decide how to fund a purchase.

07Using finance to pay tax bills

Some businesses borrow to spread a large VAT, Corporation Tax or Self Assessment payment. A VAT or Corporation Tax loan pays HMRC on time while you repay in instalments. Interest on this kind of borrowing is often allowable, but check with your accountant, especially for Self Assessment where the tax relates to you personally rather than the business and relief may not be available.

08VAT and business loans

Loans and the interest charged on them are generally exempt from VAT, so there is no VAT to reclaim on interest. Some related costs, such as legal or professional fees, may include VAT, which a VAT-registered business can usually reclaim through its VAT return in the normal way if they relate to taxable business activity. Borrowing does not change your VAT obligations: you continue to charge and reclaim VAT on your sales and purchases as usual.

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09Keeping the right records

• The loan agreement and a note of what the funds were used for
• Lender statements showing interest and fees paid
• Invoices and receipts for purchases made with the loan
• Business bank statements, kept separate from personal accounts

10How much tax does deducting business loan interest save?

Deducting business loan interest saves tax at the rate you pay on your profits, so the saving is a share of the interest, never all of it. Relief lowers the cost of borrowing; it does not cancel it.

Limited companies

A company saves Corporation Tax on deductible interest. GOV.UK sets the small profits rate at 19% for profits of £50,000 or less and the main rate at 25% for profits above £250,000, with marginal relief in between. As an illustration only, £1,000 of deductible interest would reduce Corporation Tax by £250 for a company paying the main rate, or £190 at the small profits rate.

Sole traders and partners

Interest reduces your taxable profit for Self Assessment, so relief comes at your own Income Tax rate, and lower profit can also mean lower Class 4 National Insurance, which most self-employed people pay through Self Assessment. GOV.UK's list of allowable financial costs includes interest on bank and business loans, hire purchase interest and alternative finance payments, but not repayments of the loans themselves. Our guide to sole trader loans covers the borrowing side.

Residential landlords are treated differently

If you borrow as an individual to buy or improve residential lettings, the interest is not deducted from rental profit in the same way. Instead you receive a tax reduction worth the basic rate, currently 20%, of your finance costs, subject to limits set out in GOV.UK's guidance for residential landlords. Companies, partnerships and mixed-use property have their own rules, so take advice before choosing how to hold a let property or investment mortgage.

11How we can help with the borrowing

12Cash basis and loan interest: the old £500 limit has gone

Sole traders and partnerships using the cash basis used to face a cap on interest. GOV.UK confirms that the cash basis became the default way to work out trading profits from the 2024 to 2025 tax year, and that the rule limiting cash basis users to deducting no more than £500 of interest a year was removed entirely. Interest on borrowing used wholly and exclusively for the trade can now be deducted in full under either basis.

If your borrowing is partly personal, only the business share of the interest counts, as explained above.

13When interest deductions are restricted for large groups

The Corporate Interest Restriction limits how much interest large groups can deduct for Corporation Tax. HMRC's Corporate Finance Manual sets a £2 million a year de minimis: if a group's net interest expense is below £2 million, no restriction arises. For the vast majority of small and medium-sized businesses, loan interest is therefore deductible in the normal way.

14Annual Investment Allowance on equipment bought with finance

If a loan or hire purchase agreement pays for equipment, the purchase itself can reduce your tax bill as well as the interest. The Annual Investment Allowance is £1 million and covers most plant and machinery, though not business cars. GOV.UK explains that with hire purchase you can claim for all the payments you will make under the contract once you start using the item, but not the interest, which is deducted separately as a finance cost.

Our pages on business hire purchase and asset finance explain how these agreements work.

15Can you write off a business loan against tax?

No. The capital you borrow is not income when you receive it, so paying it back is not an expense either. What reduces your tax bill is the interest and finance charges on borrowing used for the business, plus any capital allowances on equipment the loan buys. If a lender ever agrees to write off part of a debt, the tax treatment depends on your circumstances, so speak to your accountant before you agree terms.

16Planning to borrow?

If you are weighing up finance for equipment, a tax bill or working capital, Instant Quotes shows which lenders on our panel fit your business in minutes, with no credit check. We search the market and arrange the finance; your accountant advises on the tax. Our pages on VAT and tax loans and unsecured business loans cover the most common options. Any broker fee depends on the lender, with nothing to pay upfront.